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Why HBO Can't Afford To Offer A Stand-Alone Streaming Service

So I’ve sparked something of a controversy without really meaning to by writing this post on piracy and Game of Thrones. I basically argued that if HBO wants to curb piracy, they should offer a stand-alone HBO GO service for non-cable customers, cord-cutters, and so forth.

The thing is, HBO probably isn’t all that concerned with piracy.

They have a business model that works, they make plenty of money and have gained plenty of subscribers and, to make a long story short, they don’t want to fix something that isn’t broken.

This is a frustrating reality for those of us who prefer to consume our entertainment online, but we represent a relatively small demographic. This may change in the future, and certainly cord-cutting is on the rise, but at the present there is no incentive for HBO to worry about piracy or to offer a stand-alone service.

I do think that the fact that cable has become so expensive, especially since customers now also pay for broadband access, is a problem. I’m not sure that there is any simple way to address this problem, however, until it becomes unsustainable for the entertainment industry. The huge number of channels and costs associated with those channels provide subsidies for the content we see on premium channels such as HBO.

If HBO were to break off and do a stand-alone service they would be giving up those subsidies and would incur huge additional costs in terms of support, billing, and infrastructure that they currently aren’t burdened with. This would make producing the content they produce now – including extremely expensive shows such as Game of Thrones - impossible. At the very least, it would be a huge risk.

Furthermore, if HBO broke away from cable they would have to do so by ending lucrative contracts with the cable industry that make their business model possible. These are the challenges and obstacles that make such a move a gamble for HBO. So my earlier post may as well be chalked up to wishful thinking.

The wishful part hasn’t changed, but I realize the flaws in my arguments. Indeed, the flaw in my premise. It turns out, piracy just isn’t that big of a deal for HBO – which is sort of what techie types have been saying all along. It’s sort of a catch-22 for internet evangelists when you think about it.

In my follow-up post I argued that HBO should keep its content exclusive but offer a stand-alone service. This makes sense, but only if you choose not to factor in all the other associated costs and losses that HBO would face leaving cable.

Maybe someday down the road, if (when?) cord-cutting really does take off, HBO will have to rethink this model; maybe cable itself will need to change the way it serves up channels or adjust how it prices its service. But at the present, no matter how badly I may wish it weren’t the case, this is not going to happen.

So is HBO to blame for record levels of piracy on Game of Thrones?

Yes, but only because piracy isn’t actually a threat to their business model at this point. In an ideal world HBO would be able to retain its relationship with the cable companies and offer a stand-alone service, but we don’t live in an ideal world. More likely the same forces that see Netflix as a threat would turn their ire toward HBO as well. Since a streaming model isn’t viable at this time, HBO would suffer enormously which would in turn lead to less content and lower budgets for shows. Probably no Game of Thrones, no Rome, and so forth.

In any case, I have learned a great deal about this since writing my first post on the subject. I still wish HBO would offer a stand-alone service. I think it would be great for consumers like me. But at present, there just aren’t enough consumers like me available. I didn’t take into account the many factors that might prevent HBO from exercising this option when I first waded into this argument. I should have. Nor did I intend to misconstrue anything that HBO Co-President Eric Kessler said in my initial piece. Kessler may or may not be wrong about cord-cutting being a result of a down economy, but he is right about many other things. And he knows his business better than I do, and what challenges it faces. Dustin Curtis called my piece “linkbait” but that was not my intention either, though I do think I betrayed my own misunderstanding of many of the finer points of this debate.

All that being said, I don’t think this will last forever.

I do think that the internet is the future of television, and that the current model is flawed. I don’t like the fact that high-quality television requires de facto subsidies from the myriad other low-quality channels out there. But the contradiction remains: a la carte cable or stand-alone services would save customers money, but would also vastly restrict what sort of quality programming would be available.

That’s a bad trade, even if cable is overpriced. You pay for what you get, and for someone like me that means I pay a lot for only a few channels, but those channels wouldn’t exist without the rest serving as a financial bulwark for their success.

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1. HBO GO is not just a fun little internet project – it’s a Trojan Horse so that if and when a standalone service makes sense, HBO has a product in place.

2. The cable companies (or pay-TV providers – FIOS and Uverse do not technically deliver “cable” TV) all own access to the internet. Depending on the network, somewhere between 75 and 95 percent of customers have cable and internet through the same provider.

Since they own your broadband connection, it’s pretty easy for them to react if they feel their revenue is being threatened by cord-cutting. Bandwidth caps are an easy one: if pirating GOT costs you $10 in bandwidth overages every time you do it, that HBO subscription is going to look mighty affordable.

I’m glad that you wrote this follow-up essay. I liked the original essay, but it was definitely flawed in my opinion. The fact that you responded and acknowledged the new information definitely raises my opinion of you as a writer.

Maybe someday down the road, if (when?) cord-cutting really does take off, HBO will have to rethink this model; maybe cable itself will need to change the way it serves up channels or adjust how it prices its service. But at the present, no matter how badly I may wish it weren’t the case, this is not going to happen.

I think it will happen if the “broadband, no cable” percentage of US households climbs up to about 30-40%. At that point, HBO would seriously have to consider offering a web-only service – and they wouldn’t be the only ones doing it. Everybody in the entertainment media business would be experimenting with new business models in that environment.

I do think that the internet is the future of television, and that the current model is flawed.

We’ll eventually get there. Broadband internet is one of the most profitable services provided by Comcast and the other major ISPs. If demand for more data/bandwidth and faster access continues, we’ll eventually see the ISPs/cable providers start to downplay the cable television side of things in favor of their internet offerings.

Part of me wonders if Net Neutrality might end up being a barrier to that. After all, if they can’t create their own profitable online video offerings, the ISPs don’t have as much of an incentive to drive towards online video service.

I don’t like the fact that high-quality television requires de facto subsidies from the myriad other low-quality channels out there. But the contradiction remains: a la carte cable or stand-alone services would save customers money, but would also vastly restrict what sort of quality programming would be available.

I don’t think they would save the customers too much money, except in the case of a package that omitted sports programming. Bundling just makes sense in a business with high fixed costs and low marginal costs, like the cable/broadband business – once you’ve built the minimum infrastructure, it can run either ten or two thousand channels with little difference in cost.

When I was a kid, in 1979 I remember the day my father got HBO. It was on coax and was the only ‘cable’ channel that we could get. It resided on Ch3 on an old manual rotary know TV with no remote. HBO started as a B2P product before satellite and cable operators became common place.

Having cut the cord 2 years ago and boosted my internet speed to 50MB, I too wish HBO once again had a stand alone service… I subscribe to netflix, xbox gold, have a roku and an appleTV, yet no way to watch HBO shows any time shortly after release.

Come on HBO, be a trend maker again 30+ years after I first watched you!

I dont think anyone was suggesting they go directly from a cable model to a online only service. We want both as an option. Hell make the HBOGO standalone 40-50$ a month as a test to see what kind of response they get. And heres another idea… Make it available world wide! I am sick of the restrictions so many countries have to deal with when it comes to waiting months to a year to be able to watch content legally. So start with a small change/option and go from there.

Where HBO is the sole producer of the content, worldwide access would make sense, but where HBO is sharing production costs with other content distributors in other countries, it starts to get into the troublesome problem of the present country by country checkerboard of rights that global internet content distributors like Viki.com and Crunchyroll.com have to wrestle with.

Good point sir. I guess if we assume they could break off HBO sole producer content, like game of thrones, then maybe they could follow the example Louis C.K. set by offering his standup special for 5$ via a download from his own website with no restrictions or DRM crap etc. Anyone in the world could download his show which makes it a true world wide release. How cool would that be for a show like AGOT!.

The halfway house is, of course, per episode sale. An entire season is too long to expect the most lucrative part of the cord cutter market to wait, but a per episode purchase available a week after the episode goes to air, would be a substantial improvement in terms of access. Per episode purchase on iTunes, the Playstation Network and the Xbox/Zune at $2/episode would be compelling for someone who only wants one HBO show, but anyone with cable who watches two or more a week would still prefer the cable subscription and buffet access.

Then the cascade goes to less expensive per season packages for the previous seasons, then to Netflix two seasons later.

Is there a reason that the two are mutually exclusive? Would it not be possible for HBO to maintain it’s contracts with Cable providers, while offering HBOGO as a standalone service?

I would imagine a scenario where standalone HBOGO costs more than it would through cable (Say $30/month vs. $20/month through Comcast), so they aren’t undercutting the cable providers and lessening peoples’ incentive to sign up through a cable provider.

Considering the cost, I doubt there’s too many people who subscribe to cable ONLY for HBO, so in this scenario a stand alone product reels in people who are unwilling to pay for cable, while leaving it more affordable for people with cable to get HBO through their cable company.

The cable companies are going to complain, so long as they are providing the bulk of HBO revenues, although with competition between landline cable, satellite and IP based systems like FIOS, they might not be in a position to do anything about it.

Offering both is not out of the realm of possibility…as is obvious to everyone. And I agree with others that the two are not something to be mutually exclusive, or a this or that..or nothing model. I point to Sports and Sports Networks as the perfect example. Sports is a standard example given in the Cable vs. Cut-Cable debate….get rid of Cable and you lose a lot of the Sports offerings restricted to Cable contracts. BUT if one wants to…for a price, they can get Packages of Sports….NHL Package…SEC Package…NFL Package…which may be pricey considering, but paying for an entire season and getting to watch any game you want- not being restricted by Cable/Network blackouts is a pretty good aspect. Mainly because with Cable itself…you either will not get all Sports broadcasts anyway, only a select few…or have to pay additional charges to the monthly rates for the addition of the Cable Sports packages. That’s paying not just for standard Cable- typically quoted at @ $50 or so, but additionally about $20-50 + depending on package, how many packages…or even if preferring HD instead of SD.

All of this is offered through various Sports Packages on their own, through a multitude of resources….all the while STILL offering and meeting with the contracts to Cable/TV Networks. It simply gives them more revenue sources. If HBO did similarly, which it already does in a sense by selling individual series…it would be doing the same. All simply giving the consumer more choices, independence, and still committing to any business contracts already in place.

The problem here is deeper than just HBO’s economics. Arguably, online streaming is helping to kill quality television outright. I see a real race to the bottom here and IMHO in a few years the only place we will see any quality TV at all is via premium services like HBO.

See my post for my extended argument; but in a nutshell the economics of TV (broadcast or streamed for free, paid for by ads and measured by Nielsen) make studios risk-averse. That pressure is going to get worse, not better, as the cut-cord movement grows.

A la carte pricing is essentially the same thing as cutting the cord, once you pair it with DVR. And you’ve already conceded that a la carte would put negative pressure on quality. This is the same thing, but worse :(

Cable/satellite TV is way overpriced! How about HBO (and other “premium” channels) still be a part of cable TV, but have their websites stream the channel with commercial ads? Make the advertisers pay for the network shows, not the subscribers. I think that’s the future of TV. Cable providers and TV networks split the money made off of advertisers and product placement, not charging the viewers. Information and culture should be free to American citizens, not over 60 dollars a month EACH for basic cable TV and broadband internet. Saving on cable TV and broadband internet, every American household would have at least another $1400 per year to spend on products being advertised.